Term Loans vs Working Capital Loans

Businesses and loans are interrelated to each other. Almost every business, irrespective of how big or small, requires funds from time to time to meet and fulfil financial obligations, such as funding day-to-day operations, paying salaries and rent, etc.

A financial loan is a great way to acquire funds. Term loan and working capital loan are two of the most popular kinds of business loans that are readily available for individuals. This article will shed light on different aspects of both types of loans and cover the differences between the two based on different parameters.

Working Capital Loan vs Term Loan

Term Loans

Also referred to as a business term loan, a term loan is a kind of business loan that features a repayment tenure of 1 to 10 years. It is one of the most popular methods of financing that most businesses opt for whenever they require funds to fulfil business-related expenditures.

The majority of business loans are taken by business owners to fund capital expenses like business expansion, asset purchase, upgrading machinery, etc.

A business term loan is deemed a secured loan and unsecured loan, meaning that customers need to pledge security as collateral to acquire the loan amount. Moreover, it is also available for diverse terms, i.e., as short term, medium term, or long term loans.

Key Features of the Loan Include:

  • Repayment tenures are usually longer
  • Higher loan amount
  • Interest rates are lower
  • Multiple EMIs
  • Collateral is mandatory
  • Loan disbursement takes time
  • Involves complex paperwork

Working Capital Loans

A working capital loan refers to a short term loan that features a repayment tenure between 3 to 14 months. The majority of individuals opt for a working capital loan to finance the costs of running and operating a business, irrespective of whether they are routine operations expenses or any other type of fund requirement.

Companies and organisations can also opt for a working capital loan to clear the salaries of employees, pay the rent of the office premises, or cover other types of daily expenditures.

One of the most essential criteria of a working capital loan is timely repayment. Hence, businesses in need of funds can opt for working capital loans whenever they want. Depending on the amount of funds they require, companies and organizations can acquire an appropriate amount of loan.

Key Features of the Loan Include:

  • Repayment tenures are shorter
  • Smaller loan amount
  • Interest rates are higher
  • Limited EMIs
  • Collateral may or may not be mandatory
  • Loan disbursement is quicker
  • The loan process is simpler

What Are The Differences Between Working Capital Loan And Term Loan?

ParameterWorking Capital LoanTerm Loan
Repayment TenureWorking capital loans feature a shorter repayment tenure or maturity period. It does not exceed 12 months.Business term loans can be repaid across the tenure of 1 year to 5 years.
Loan AmountWhen it comes to a working capital loan, the amount sanctioned by lending institutions is usually smaller.Business term loans offer comparatively higher loan amounts.
Rate of InterestSince working capital loans are a type of unsecured loans, they feature higher interest rates.As compared to other types of loans, term loans feature lower rates of interest.
Loan TypeWorking capital loans are short term loans.Business term loans are long term loans.
PurposeWorking capital loans are acquired for covering working capital requirements of any business entity. Individuals avail of term loans for financing expansion, purchasing new assets, or covering other business-related expenses.
Eligibility CriteriaWorking capital loans feature a less rigid eligibility criteria.Individuals who wish to acquire term loans need to satisfy stringent eligibility criteria to access funds.
PaperworkOpting for working capital loans does not involve tons of paperwork or lengthy procedures.Term loan approvals involve tons of paperwork and procedure compliance.
CollateralWorking capital loans do not require collateral.Term loans require individuals to pledge security as collateral.
TypesSome popular types of working capital loans include account receivables loans, business credit line, factoring, advances, etc.Different types of term loans include short term loans, long term loans, intermediate term loans.
Credit ScoreWorking capital loans do not enhance the borrower’s credit score. Term loans improve the borrower’s credit score.

Term Loan or Working Capital Loan – Which One is Better for You?

Both term and working capital loans offer customers numerous lucrative terms which facilitate them to cover business operations that are regulated and optimal. However, determining which finance method is better depends on the requirements of the customer.

For instance, opting for a business term loan makes more sense if an individual is looking for a financing source to fund investment-heavy ventures.

However, if the company only requires a small amount of funds simply to cover day-to-day expenditures, it would be best to opt for a working capital loan.

Besides this, timely repayment on term loans can significantly improve the business credit, mainly because the sanctioned amount is generally very high. On the other hand, working capital loans do not provide credit score enhancement. Thus, the choice of financing depends on the nature of capital required by the individual.

Hence, it is vital for individuals to determine the purpose for which they wish to acquire a loan and the nature of the capital they wish to acquire. Once they have done both, they can easily apply for a loan from a trusted online or offline platform.

Even though there are many places from where individuals can acquire a term loan or a working capital loan, it is important to ensure that the place or platform they choose is reliable. One of the most trusted platforms that offer numerous types of loans, including term loans and working capital loans, is Yubi Loans. The platform has served over 3000 borrowers and features more than 750 trusted lenders, each of which offers exciting benefits and profitable terms. Moreover, the online platforms also offer 5x quicker transaction time. It is a great place individual can turn to whenever they require funds.

What Documents are Checked During a Loan Application Process?

  • Bank Statements
  • Market Reputation
  • Ability to Repay
  • Creditworthiness
  • Collateral

Can Term Loan be given for Working Capital?

Working capital refers to the difference between a business or company’s current assets and current liabilities. It refers to the measure of the amount of liquidity available for its daily expenditures. When a business’ working capital reserves do not have sufficient funds, it may face issues to keep functioning normally or staying afloat.

Hence, a business may opt for a working capital term loan to enhance its cash flow. Such a type of loan is generally availed for short-term funding requirements and is offered to businesses according to their requirements.

FAQs

What is a Working Capital Loan?

A working capital loan refers to a loan taken by business owners to fulfil any short-term financial needs and requirements or cover daily expenditures.

What is an example of a Term Loan?

Some of the most common examples of term loans include overdrafts, equipment financing, etc.

How many business days after you submit your application will you receive a loan estimate form?

Different financial institutions take different times to send a loan estimate form to customers. Usually, it takes up to 3 days for a lending institution to send a loan estimate form to customers.

Do I need to pledge a collateral asset to avail a Working Capital Loan?

No. Pledging an asset as collateral is not necessary to access working capital loans.

Does a term loan provide any tax benefits?

Yes. Individuals can write off the term loan’s interest as a business expenditure to avail of tax benefits.

Is a guarantor necessary to access Working Capital Credit?

No. Working capital loans are deemed an unsecured method of financing; thus, customers who wish to opt for a working credit loan do not need to present a guarantor to avail of the loan credit.

How long does it take for a Term Loan to process?

Lending companies and institutions may take up to 2 months or 60 days to disburse business term loans.

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